Maybe the Individual Mandate Is Enforceable

The IRS commissioner explains how he'll make you buy health insurance.

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IRS Commissioner Douglas Shulman

Last month I examined the troubling possibility raised by Timothy Jost, a health reform supporter and professor of law at Washington and Lee University, that health reform's "individual mandate" might prove unenforceable. But this week, Internal Revenue Service Commissioner Doug Shulman seemed to indicate that if you didn't purchase health insurance and then refused to pay the fine, the IRS could seize any current or future tax refund headed your way. This leaves me feeling a bit confused.

The individual mandate will be phased in between 2014 and 2016. The new law says that if you don't buy health insurance, you'll have to pay a fine of either $695 or 2.5 percent of your income, whichever is higher. People who don't earn enough to pay income tax or who, if forced to purchase health insurance, would end up spending more than 8 percent of their annual income, are exempt.

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What if your failure to obtain health insurance means you owe the penalty but you nonetheless refuse to pay it? That's where things get tricky. The IRS can't throw you in jail, because the health reform law explicitly states (on Page 336): "In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure."

Nor can the IRS seize your property, because the law states (also on Page 336) that the health and human services secretary may not "file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty … or levy on any such property with respect to such failure."

As Jost pointed out on the New England Journal of Medicine's Web site, these restrictions would appear to pose a greater threat to enforcing the individual mandate than any nullification attempts by the states. "Compliance," Jost wrote, "will … belargely voluntary (although the IRS can still make a tax resister'slife miserable, whether or not it can ultimately collect)." State legal challenges, though unlikely to sway federal courts, might nonetheless "be seen as invitations to civil disobediencethat counsel state citizens to 'violate the federal law, wavethis statute in their face, and dare them to come after you.' " Which, in this instance, the IRS can't do.

Or can it? In his National Press Club appearance on April 5, the IRS's Shulman was asked, "How will you penalize individuals who don't purchase coverage?" (The question-and-answer portion, alas, is not included in the IRS transcript of Shulman's prepared remarks, which didn't address health reform at all. Instead you must advance this video to 35:10). Here is how Shulman replied:

When someone files their return, the insurance company will send us a little box that is checked, a yes-no question, that says do they have coverage or not. They'll send it to the individual, the individual will attach it to their return, and they'll send it to us. Think [of it] just like a 1099, where you get information reporting about the interest that you have on the bank account. We will run matching programs around that, and if somebody doesn't have coverage they'll either have paid the penalty that they owe or they'll get a letter from us saying that you owe this amount.

I think there's a couple important points that I would make, though, about our role in health reform. One is these are not the kinds of things—check the box whether you're here or not—that we send agents out about. These are things where you get a letter from us. Second is Congress was very careful to make sure that there was nothing too punitive in this bill. … First of all, there's no criminal sanctions for not paying this, and there's no ability to levy a bank account or do seizures, some of the other tools.

This answer did a good job of explaining what the IRS wouldn't do to enforce the individual mandate; it shed little light on what the IRS would do. But Shulman later got asked a more pointed follow-up question (advance to 46:26 into the video): "If you can't use sanctions to collect health care fees, what will keep people from getting away with not signing up for insurance coverage?" Here is how he answered:

My belief is while some people may play with the kind of question that was asked, the vast majority of American people have a healthy respect for the law and want to be compliant with their tax obligations and whatever else the law holds. People will get letters from us. We can actually do collection if need be. People can get offsets of their tax returns in future years [italics mine], so there's a variety of ways for us to focus on things like fraud, things like abuse, and we're gonna run a balanced program.

But if the IRS owes you a refund, isn't that refund in effect your property? And if the IRS decides to withhold part or all of that refund because you didn't pay your tax penalty for not obtaining health insurance, doesn't that amount to seizure of your property? Or was Shulman just talking about people who might claim they paid the penalty but really didn't, or who might claim that one of the law's exemptions applied to them when it really didn't, or who might engage in some other form of conscious duplicity that violated some other statute? (Is that what Shulman meant by "things like fraud, things like abuse"?) I'm not certain Shulman's reply addressed the scenario Jost envisioned, wherein a civilly disobedient citizen would forthrightly tell the IRS: Yes, under this law I owe you $695, but I refuse to pay it. What are you gonna do about it?

Maybe I worry too much. Here is what Jost had to say about Shulman's remarks after I e-mailed them to him:

First, I would suspect that this is something the IRS has not yet totally thought through. They have to immediately get the tax credits to small businesses program up and running, and with four million businesses as potential beneficiaries, they are probably more focused on that then on a program that is four years away.

Second, the statute prohibits criminal sanctions and liens and levies on property to collect the penalty. It is essentially a tax, however, so the IRS is responsible for collecting it. I am not a tax expert, but I would see no reason why they could not offset it against a refund. They are not going to pay you money if you owe them money. They will also send out letters asking for the payment, as is their right.

Since only people who earn income above the filing limit and for whom health insurance premiums are less than 8% of income are covered by the penalty, I would expect that most of the people who might get hit by the penalty will be independent contractors and self-employed individuals—farmers, ranchers, lawyers, accountants, movie script writers, consultants, etc. Most of these people have complicated taxes and probably will 1.) want health insurance, and 2.) prefer to keep their heads down with the IRS. If you are filing a hundred-page tax return, the last thing you want to do is to throw up a red flag in the face of the IRS.

This is, in fact, going to be a non-problem, and certainly is not a problem yet. A few tea party types will want to pick a fight with the IRS, and the IRS will ignore them, or catch them on something totally unrelated.

Apparently the "invitations to civil disobedience" that Jost wrote about in February aren't troubling him so much in April. Certainly the political climate has changed. As Evan McMorris-Santoro has observed on Talking Points Memo, the passage of the health care reform law didn't stir anything like the kind of visible public anger that Republicans predicted (and that surfaced in town hall meetings last summer). The much-threatened repeal movement is sputtering to a halt before it even gets started. Maybe it's the vernal equinox. In deference to health reform's budding trend toward optimism, I hereby downgrade the enforceability issue from an impending crisis to an interesting question whose answer we'll know soon enough.

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